The population of Australia is approximately 23 million with the majority living along the eastern and south-eastern coast in and near the major cities of Sydney, Melbourne and Brisbane. Australia is the sixth largest country, by area, in the world – being slightly smaller than the United States' contiguous fifty states. Given its size, flying time between certain major cities is as much as six hours. The official language is English. However, with significant levels of immigration since the 1940s, many Australians are fluent in other languages.
The tax rates applicable to income derived from conducting business in Australia is generally considered very competitive, compared with the corporate tax rates applicable in other major economies, such as the United States, France and Japan.
Australia is a federal parliamentary democracy, with six states and two mainland territories. The head of state is Queen Elizabeth II (who is represented by the Governor General) and the Prime Minister (currently Julia Gillard) is the head of government. Government and laws exist at three levels: the Commonwealth (federal) level, the state/territory level and the local/municipal level. Federal parliament consists of the Senate and the House of Representatives, being the upper house and lower house respectively. The High Court of Australia is the ultimate appeals court. There are judicial systems at both the state/territory level and the federal level, with each judicial system having responsibility for different legal issues.
In 2011, GDP was approximately US$1.48 trillion and GDP per capita (purchasing power parity) amounted to approximately US$40,000. About three quarters of the labour force is engaged in the services industry.
There is a range of different structural options for carrying on business in Australia. These include:
- an Australian company;
- a registered foreign company;
- a joint venture;
- a partnership;
- an agency or distributorship arrangement;
- a trust; and
- a sole trader.
The choice of business structure will depend on various factors such as the nature and size of the proposed business and tax and legal issues.
As in other major jurisdictions, Australian companies are separate legal entities with the right to own and transfer property, to enter into contracts and to commence, and be subject to, legal proceedings. The Corporations Act 2001 (Cth) is the principal statute dealing with Australian corporate law and sets out the rules concerning financial and securities dealings and the rights, obligations and liabilities of companies, directors, shareholders and other market participants. Common law also imposes various rules on the conduct of businesses and companies.
Companies are incorporated at the federal level and are not registered separately in each state and territory. However, when incorporating a company, a state or territory must be selected as the place of incorporation. The choice of state or territory is important as it can have stamp duty implications for the company in the future.
In addition to the Corporations Act and common law, an Australian company is governed by its constitution, previously referred to as its "memorandum and articles of association". If a company does not have a constitution, it will be governed by the "replaceable rules", which are a set of common rules for the management of companies provided in the Corporations Act.
Every Australian company is required to have at least one member, at least one director who ordinarily resides in Australia and a registered office in Australia. The minimum number of directors will depend on the type of company. The two main types of companies in Australia are proprietary companies and public companies, for which different legal requirements apply.
Foreign companies wishing to establish a presence in Australia commonly incorporate proprietary companies as their local subsidiaries.
The maximum number of shareholders in a proprietary company is 50 (not including employee shareholders) and the minimum number of directors is one. At least one director must ordinarily reside in Australia. A proprietary company is not required to have a company secretary. However, if it does have a company secretary, that person (who may also be a director) must ordinarily reside in Australia.
Depending on their size, proprietary companies may be exempt from some of the regulatory requirements applicable to larger companies. As a result, they can be easier and cheaper to operate. For example, proprietary companies do not have the same disclosure requirements as public companies. Guidance regarding the administration of proprietary companies limited by shares is set out in the "Small Business Guide" in Part 1.5 of the Corporations Act.
Public companies are usually larger companies. Unlike proprietary companies, public companies are not limited to a maximum of 50 shareholders. Public companies are required to have a minimum of three directors, at least one company secretary and at least one shareholder.
Public companies can be listed or unlisted. Listed companies are companies whose securities may be traded on a securities exchange. There are several securities exchanges in Australia, however, the largest and most well known is the Australian Securities Exchange (ASX).
In order to be admitted to the official list of the ASX, a company must have:
- at least 400 shareholders; or
- if at least 25% (by number) of the main class of shares are held by parties who are not related parties of the company, at least 350 shareholders; or
- if at least 50% (by number) of the main class of shares are held by parties who are not related parties of the company, at least 300 shareholders,
each holding at least A$2000 worth of securities (excluding restricted securities 1 ) in the company's main class of securities.
Companies that satisfy the above 'shareholder spread' requirement must also comply with various other conditions in order to be admitted to the official list of the ASX. For an overview of these requirements and the processes involved conducting an initial public offering in Australia, please request a copy of Addisons' 'Roadmap to Listing on the ASX' at: firstname.lastname@example.org. Further information can also be found at www.asx.com.au.
Unlisted public companies are not subject to the ASX Listing Rules but, as a result, they have more limited access to capital and there exists less liquidity in respect of a market for their securities.
Registering a Company
In order for a company to conduct business in Australia, a company must be formed by registration with the Australian Securities & Investments Commission (ASIC). Registration officially brings the company into existence and allows business to be conducted under the registered name.
When lodging an application, the applicant is required to nominate:
- the type of company to be registered;
- the name of the company (the name must not already be registered);
- how the company will be internally managed, i.e. under its own constitution, the replaceable rules in the Corporations Act or a combination of both;
- the director/s and company secretary (if any);
- the member/s of the company;
- whether the company will be limited by shares or guarantee or both; and
- the principal place of business and the registered office of the company, which must be located within Australia.
Once ASIC is satisfied with the application, it will register the company, issue the company a certificate of registration and a registration number known as the Australian Company Number (ACN). This can happen within a day. The ACN must be used on every public document of the company including all cheques and documents lodged with ASIC.
Once a company has been registered, it must maintain and keep up-to-date a register of its officers and security holders and its minutebooks within the jurisdiction, usually at its registered office.
Further, the company may be subject to annual financial reporting obligations to ASIC. As a starting point, all public companies, large proprietary companies and small proprietary companies that are controlled by foreign companies are required to lodge an audited financial report and directors' report with ASIC each financial year. Certain foreign-owned Australian companies however, may be eligible to apply for an exemption from these requirements depending on the size of the company and the group's operations in Australia.
As an alternative to establishing a subsidiary as a new Australian company, a foreign company may conduct business in Australia by registering itself as a foreign company in Australia, i.e. as an Australian branch.
A foreign company wishing to carry on business in Australia as a branch must register as a foreign company with ASIC. An application for registration of a foreign company must be lodged with ASIC, together with certified copies of its certificate of registration and other constituent documents.
The following information must be provided to ASIC when registering as a foreign company in Australia:
- the name of the company;
- the registered office of the company in Australia;
- the directors (or equivalent officeholders) of the company;
- the company's local agent, who must be a person ordinarily resident in Australia;
- details of the company's registration and registered office in its country of origin; and
- certified copies of the company's certificate of registration (or similar document) and constitution, amongst other documents, including certified English translations where necessary.
The company is registered as a foreign company when ASIC enters the foreign company's name in its register. Once registered, ASIC will also issue the foreign company with an Australian Registered Body Number (ARBN). The registered foreign company will then be required to lodge certified copies of its balance sheet, cash flow statement and profit and loss statement with ASIC each calendar year (even if it is not required to prepare such documents in its place of registration). Foreign companies registered in Australia must also maintain a register of its members within Australia and comply with various notification obligations under the Corporations Act.
Further information can be found at www.asic.gov.au.
A joint venture may be entered into between two or more individuals, companies or other legal persons. Joint ventures are often formed for a specific project or business venture but may also be formed for a continuing business relationship.
Entering into a joint venture agreement with an existing Australian entity can avoid the need to incorporate an Australian subsidiary or register as a foreign corporation. Joint ventures are governed primarily by the terms of the joint venture agreement (or similar document) in addition to general law. Care is needed because a foreign entity cannot "conduct business" in Australia unless it is registered in Australia.
Partnerships may be entered into between two or more individuals, companies or other legal persons.
Partnerships can be registered or unregistered. An unregistered partnership does not have the public disclosure and reporting requirements that apply to corporations or registered partnerships. However, unregistered partnerships have unlimited liability and, generally, partners are personally liable, jointly and severally, for all debts and obligations of the partnership. In contrast, the liability of the members (or owners) of a company is limited to the amount of their investment in the company.
Whilst limited liability partnerships – which must comprise at least one partner whose liability is limited and one general partner whose liability is unlimited – can be established, once registered, they have a different tax profile to a simple partnership.
Foreign companies that wish to develop a business presence and reputation in Australia but which may not be prepared to invest the necessary capital, human resources and/or systems to operate a permanent establishment in Australia, may alternatively enter into a distributorship arrangement – exclusive, non-exclusive or otherwise – with a local representative.
Distributorship arrangements generally involve costs which are lower than the costs involved in establishing an Australia branch office. This is because the foreign entity avoids the costs of maintaining customer accounts and ensuring compliance with applicable regulatory requirements (including corporate and tax obligations).
However, distributors may also demand a higher share of the sales proceeds depending on the terms of the distributorship agreement. Distributors may earn a higher share of the revenue generated from the sale of the foreign company's products due to risks incurred as the local distributor. For example, the distributor may assume a greater degree of legal and commercial risk in relation to the promotion and sale of the product.
A trust can be formed to operate a business in Australia. A trust is managed by a trustee who has the legal title to the trust property and carries on the business on behalf of the beneficiaries of the trust. The rights of the beneficiaries are determined by the terms of a trust deed.
A common form of trust is a discretionary trust which provides maximum flexibility to the trustee in relation to the distribution of income and capital among beneficiaries.
Another form of trust is a unit trust which is most suitable for investment purposes where investors hold a number of units in the trust in proportion to their investment.
Some trusts and companies "staple" their units and shares respectively so that each unit and share must be traded together as a "stapled" security.
Trusts can carry a very different tax profile from that applicable to companies, and this is often a key consideration in selecting a trust structure.
An individual may carry on a business on his or her own behalf as a sole trader. A sole trader is personally liable for all obligations incurred in the course of the business. If a sole trader wants to trade under a name that is not his or her own name, then a business name must be registered.
Directors of Australian companies owe duties under the Corporations Act and common law to their company and their company's shareholders. Among the duties owed by directors are duties to:
- act in good faith and in the best interests of the company;
- act honestly;
- avoid situations where there is a conflict of interest between the company and the director;
- exercise due care and diligence; and
- prevent insolvent trading by the company.
Breaches of certain directors' duties carry serious penalties including fines, imprisonment and being prohibited from acting as a director or managing a company. For instance, a director who is reckless and fails to exercise his powers and discharge his duties in good faith in the best interests of the company can be ordered by a court to pay up to A$200,000 and be sentenced for up to five years imprisonment or both.
1"Restricted Securities" are securities that are unable to be traded or encumbered for a prescribed period of time.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.